It's time to keep a close eye on natural gas

Key points

• Natural gas has been basing since plunging -80% between August 2022 and April 2023
• On an anecdotal basis, the decline seems overdone, and the market due for a rally
• Nevertheless, history suggests holding off a while longer before testing the long side of this volatile market
• Aggressive, well-capitalized traders might consider the short side

Natural gas is a highly cyclical market

Natural gas is a highly volatile market. So far in 2023, most of the volatility has been to the downside, with a roughly 40% decline. As you can see in the chart below, most damage occurred in the first two months of the year. Natural gas has essentially traded sideways for the better part of four months. Typically when a market is this beaten down and appears to be forming a base, it makes sense to begin looking at trading the long side in anticipation of a reversal of fortune. But history suggests waiting a while longer before testing the long side of natural gas.

The chart below displays the annual seasonal trend for natural gas futures.

An unfavorable period extends from the close of Trading Day of Year (TDY) #115 through TDY #140. For 2023, this period extends from the close on 2023-06-14 through 2023-07-25.

For testing purposes, we will use daily natural gas futures data from Bloomberg, using a data series that tracks the spot futures month,

The chart below displays the hypothetical cumulative $ +(-) from holding a long position in natural gas futures only from the close of TDY #115 through TDY #140 since 1990.

The table below summarizes natural gas performance only during this period.

Natural gas showed a gain of only 15% of the time during this period

What the research tells us…

From a technical analysis perspective, a trader could argue that natural gas is forming a consolidation base following a devastating decline. Nevertheless, the seasonal trend highlighted above is a stark warning about the potential danger of playing the long side of this volatile market over the next roughly month and a half. A well-capitalized trader who can stomach extreme volatility might consider playing the short side.